We’ve looked at the assets, now it’s time for the liabilities. As mentioned before, I’m focusing only on the two largest pension funds in Pennsylvania — Pennsylvania School Employees and Pennsylvania State ERS.

LIABILITYGROWTH

Let’s just look at the full pension liability to begin with:

Nothing particularly weird, but note it keeps growing.

The CAGR (compound annual growth rate) of the pension liability (not the unfunded liability) from 2001 – 2015 was about 5% for both plans.

Over the same period, the CAGR for the “required” contribution was 24% for PA Schools and 27% for PA State ERS. That’s 24% and 27% PERYEAR. Not total cumulative increase.

CONTRIBUTIONPATTERNS

So what’s the deal with that huge growth in contributions?

PA School Employees

PA State ERS

They were doing something in those early years to keep those ARCs way way down. And once the ARCs were calculated a little more realistically (perhaps), those ARCs started rising as they kept underfunding… and a few other things.

Let’s compare the ARCs (this includes the two other plans in the database) against state revenue:

Yeah, that can put a squeeze on things.

FUNDEDRATIOS

So here is where we can see some of the tricksiness. We’ve got steadily rising liability values, we saw a big drop in asset values in 2008 — what did the funded ratios do?

PA School Employees

PA State ERS

Now wait – that doesn’t make much sense. The funded ratios went up in 2008?

It makes sense once you realize the assets are being “smoothed”.

Let me unsmooth those assets for you and give you a re-calculated funded ratio:

If you look at the solid lines — the ones using market value of assets to computer the funded ratio, unsurprisingly that line is very volatile. “But of course!” say the pension fund managers – “We’re in volatile assets!”

Might I make the suggestion that some very steadily growing liabilities should not be supported by volatile assets? At least, assets which are that volatile?

For all that, you can see the funded ratios are pretty close in 2015, but the “smoothed” values are still higher. They are not as far apart as in 2008/2009 — over 20 percentage points difference. That’s pretty large.

That takes actives in the pension down, and much much later the beneficiaries will also go down.

What are the ratios like now?
PA School Employees

PA State ERS

Yup, there you see it in PA State ERS. They have way more beneficiaries than active employees – they crossed that line in 2009, when the number were equal. PA School Employees is not in a much better situation, having gone from 1.83 active employees per beneficiary, to 1.18.

These will have implications for the pension cash flows, which will be my third and final post on Pennsylvania pension trends.